Valuing a minority interest in a private company

Two numbers that are easy to confuse

Ask an owner what their 25% is worth and most will value the whole business and divide by four. That is the pro-rata value. It is a useful number, but it is not always the market value of the shares.

Market value asks what a willing but not anxious buyer would pay a willing but not anxious seller for this exact parcel. A buyer of 25% does not get a quarter of the business to run. They get a quarter of the votes, whatever dividends the board chooses to pay, and a board seat only if an agreement grants one. They price what they actually receive.

So a minority valuation has two steps: value the whole company, then decide whether the parcel is worth its pro-rata share, or less, given its rights and the purpose. The argument usually happens at step two.

What control is, and who has it

Control is the power to decide what happens to the company's money and future: who sits on the board, whether dividends are paid, what the owners draw in salary and rent, and whether the business is sold, borrows or winds up.

The board usually makes these calls, and whoever holds a majority of the votes chooses the board. Some decisions, such as changing the constitution, need a special resolution: at least 75% of the votes cast. So some thresholds matter more than the raw percentage:

• More than 50%: ordinary resolutions and, in practice, the board.
• At least 75%: special resolutions without anyone else.
• More than 25%: not control, but enough to block a special resolution, which carries negotiating weight.
• Exactly 50%: neither control nor minority. Equal holders can deadlock, so the deadlock clause often matters more than the holding.

The spread of the other shares matters too. A 30% holder facing one 70% owner has little influence. A 30% holder alongside two 35% holders may hold the deciding vote, and a buyer would pay for that.

Marketability: who would actually buy it?

Listed shares sell in seconds. Private company shares do not. There is no market, the realistic buyers are often just the other shareholders, and the company's own rules can stand in the way: the directors' discretion to refuse a transfer, pre-emptive rights that require an offer to existing holders first, and limits on who may hold shares at all.

Marketability is separate from control. Even a 100% owner faces a narrower market than a listed shareholder, but can at least sell the whole business. A minority holder usually cannot force that sale, so the two issues compound.

Discounts are a judgement, not a table

Percentage ranges for these discounts are easy to find online. Treat them with care: they come from other markets, periods and companies, and a figure lifted from a table without reasons is not a valuation. The questions that move the answer are specific:

• Are dividends paid regularly, under a policy the minority can rely on?
• Does the minority holder have a board seat, information rights or a veto?
• Is the majority taking profit out through salaries, rent or related-party dealings?
• Who are the realistic buyers, and is there an agreed way out?
• Is a sale of the whole company likely, and would a tag-along clause let the minority sell on the same terms?

Method matters too. If the valuation is built on the dividends a minority holder can expect, some lack of control is already in the number, and a separate discount on top could count it twice. A sound report shows where any reduction comes from.

When the shareholder agreement decides

Before anyone argues about discounts, read the shareholder agreement and the constitution. Between shareholders, they often settle the basis of value, and the valuer applies it rather than substituting another.

Clauses to look for

• Pro-rata fair value: shares valued as a proportion of the whole company, often expressly without any minority or marketability discount.
• Formula or agreed value: a set earnings multiple, or a value signed off each year. An agreed value nobody has updated is a common source of disputes.
• Good leaver and bad leaver: a different price depending on why a shareholder leaves.
• Pre-emption and transfer: who must be offered the shares first, and how the price is set.
• Tag-along and drag-along: on a sale of the company, the minority can join, or can be made to join, at the same price per share.
• Put and call options or buy-sell arrangements: often triggered by death, disability or retirement, each with its own valuation mechanism.

Wording matters. "Fair value", "market value" and "fair market value" can mean different things depending on the definitions, and some agreements also fix the date and the assumptions. Give the valuer the whole agreement, amendments included, and ask your lawyer if a clause is unclear.

The purpose drives the answer

The same 25% can properly carry different values for different purposes, because each purpose asks a different question. The report should say which one it answers.

On 30 June 2027 specifically: under the transitional rule for the 1 July 2027 CGT changes, individuals and trusts are generally treated as selling and reacquiring relevant CGT assets at market value just before 1 July 2027. For a minority parcel of private company shares, that is generally the market value of the shares as held, with the rights they carry. Once finalised, a government apportioning method (still a draft) may be chosen instead of a market value. A company's own post-CGT assets are outside this rule, though pre-CGT assets have their own reset. Your tax adviser decides which route suits you.

In disputes, courts have wide powers under the oppression provisions of the Corporations Act, including ordering the purchase of a member's shares on terms the court considers appropriate. Speak to a lawyer before commissioning any valuation.

Before you order a minority valuation

1. 01Name the parcelThe number and class of shares, and who holds them. Shares held through a family trust raise different questions from shares held personally.
2. 02Name the purpose and dateThe purpose decides the basis of value, so settle it before work starts.
3. 03Gather the documentsConstitution, shareholder agreement and amendments, share register, dividend history, minutes, recent financial statements and any related-party arrangements.
4. 04Check the clauseIf an agreement sets the basis of value, have your lawyer confirm what it means first.

Documents come only through the secure upload link on your matter, never by email or this website.

Independent Business Valuation values a single minority parcel as one ownership interest, for $999 + GST. Fixed fee, confirmed in writing before we start. No hourly billing and no surprises. The fixed fee applies once we confirm the interest, purpose, structure and records fit the fixed-fee scope. Anything outside it is quoted in writing before we start. Each additional parcel valued at the same date is $795 + GST. Companies with turnover over $10 million, groups of entities and disputes are quoted in writing.